Investment Ultimatum

14 April 2013, 14:51

In the early 2013, the European Bank for Reconstruction and Development (EBRD), one of Ukraine’s major lenders put forth an investment ultimatum of sorts: it requires Ukraine to improve its business environment. Otherwise, EBRD will reduce the amount of lending – currently over EUR1bn annually. Earlier, EBRD considered investing into the upgrade of Ukrainian gas transit system hoping to sign the relevant agreement this year. This stance describes the relations between the government and foreign investors. Massive corruption and the lack of proper response to their problems oust them out of the country.

According to recent news, Sevki Acuner will take over as EBRD’s Director for Ukraine on June 1 from André Küüsvek, Director since 2008 who will be promoted to Director for Local Currency and Capital Development. In his interview for The Ukrainian Week, Mr. Küüsvek talks about the main factors that make investors leave Ukraine and investment proposals to the current government which, if ignored, may force the EBRD to reduce lending.

UW: Last year, almost all FDI growth in Ukraine came from Cyprus. Why are investors leaving Ukraine? Was it the crisis in the world or the investment climate aggravated by the government policies?

Investment climate depends on many criteria, including the country’s potential, macroeconomic and financial stability, and day-to-day operations. Ukraine has the potential: it’s a big country with good opportunities in, say, steel industry and agriculture. But it lacks macroeconomic stability which puts it in an unfavourable position compared to many other countries of similar size or potential. Ukraine went up 9 points in the World Bank’s Doing Business 2012, but still remains in the league of African and Asian countries. The fact that it did a little better was mostly thanks to the reforms implemented in 2011. 2012 was a lost year. I would be surprised if Ukraine went up on the 2013 rating. Bureaucracy and pressure on business and entrepreneurs, corruption and complex laws do not encourage people to come and do business here. Last year, investment environment was bad enough to persuade the EBRD invest into just one project in Ukraine. It was a USD 10mn investment into UBC Promo, a Kharkiv-based producer of promotion and advertising materials. Just think about it! Ukraine has 45 million people, massive economy and huge territory. Yet, the number of investors willing to bring their money here is plummeting. Growing corruption is one of the reasons.

READ ALSO: High Risk Zone

UW: During his recent visit to Ukraine, EBRD President Suma Chakrabarti warned that EBRD might reduce lending for Ukraine unless its business climate improves and mentioned a number of recommendations. Has the government taken them into account? Has anything changed ever since?

We are in the process of negotiations on this with the relevant ministries, authorities and non-government institutions. Hopefully, we will have some results to share at the Council of Domestic and Foreign Investors under the President in mid-June.

UW: What is the purpose of the business ombudsman institution in Ukraine initiated by the EBRD, among others?

We believe it will be helpful to businesses, and even executive branches, the state, because it provides a consolidated platform for handling problems of individual companies and make the whole economy more transparent. Such functions are already in place in a number of countries, including Russia, South Africa, Australia and others. Hopefully, such institution in Ukraine will help enhance its investment climate and increase private investor confidence in it. We have been discussing this with a global expert who is the President of the Basel Governance Institute. He is coming to Ukraine in April to advice the Ukrainian authorities and business community, as well as international financial institutions on how to set this up. Based on his fact finding mission, he will propose a model to set up the business ombudsman function and specific actions to fight corruption and prepare to sign the anticorruption memorandum. We expect the business ombudsman function to be set up and start working in 2014. And we hope to put the memorandum setting the principles for it with the Ukrainian government by summer.

READ ALSO: Capital Drought

UW: What determines the EBRD’s investment into Ukraine this year?

It depends on macroeconomic stability first of all. But take my forecast as a speculation, not a promise.  We can continue investing at the level of the past four years. i.e. EUR 1bn or more, provided that macroeconomic factors are favourable. If we fail to reach a consensus on anticorruption efforts and other initiatives the EBRD recommended to the Ukrainian authorities, and macroeconomic situation does not improve, the amount of investment will be questionable. The signing of the IMF Stand-By Arrangement with Kyiv will be another important external factor that can revive investor interest in Ukraine. This may boost the EBRD’s lending to the private sector.

UW: At what stage is the New Safe Confinement project for Chornobyl now? It is one of the EBRD’s biggest projects in Ukraine…

In November last year, we started jacking the Arch, the core element of the confinement. It’s one of the projects that will keep us interested in Ukraine despite unfavourable investment conditions. The EBRD administers donor funding for the Chornobyl Shelter Fund and Nuclear Safety Account, and acts as donor itself. The funding is provided as grants. The EBRD is one of the major donors for these projects, contributing the total of over EUR 325mn.

UW: Why is long-term lending not developing in Ukraine? What solutions do you see to this problem?

We believe that pillar two of the pension reform, i.e. mandatory accumulation system, should be implemented in 2014. It will allow people to accumulate their funds on private accounts and may facilitate the development of long-term lending in Ukraine. Kazakhstan, for instance, was the first former Soviet Union country to start a pension reform in 1998. Today, its pension funds hold the equivalent of around USD 25bn. This is the long-term resources the country’s financial system can rely on.

READ ALSO: Foreign Banks Flee Ukraine

UW: The EBRD has virtually stopped microloans to SMEs in Ukraine. Why have these projects been hampered in the past years?

Our lending programmes for businesses went as credit lines through commercial banks. Ukrainian banks lent money out to Ukrainian SMEs. In 2009, the NBU essentially banned lending in foreign currency to unhedged borrowers, and most SMEs are unhedged. One reason for the lack of long-term lending resources on the market is the fact that institutions like ours cannot provide it in the local currency. Thus, we have unfortunately been doing less microlending in Ukraine over the past four years compared to the pre-2008 levels.

UW: The EBRD has been waiting to get the right to lend in the local currency from the Cabinet of Ministers for a few years now. Is the decision being backpedalled by the Ukrainian side?

I don’t think there are specific entities that oppose the idea of allowing the EBRD lend in hryvnia. Lending in the local currency is our common practice in 16 countries, and we have been issuing national currency-denominated loans in many states, such as Russia, Poland, Turkey, Georgia, Armenia, Azerbaijan and more. That is provided that their central banks allow us to operate accounts in the local currency freely. This has not been possible in Ukraine so far. The EBRD President visited Ukraine in February. We had meetings with the President and Premier, and highlighted the prospect of lending in the local currency and issuing hryvnia-denominated bonds as some of the key priorities in Ukraine.  

UW: How do you assess the NBU’s monetary policy?

Different times require different policies. Surely, there have been reasons to keep the exchange rate steady in the past. But our view is that Ukraine would do better in the long run with a more relaxed monetary policy, floating exchange rate and inflation targeting. We believe Ukraine would benefit from relaxing exchange rate control in the long-term prospect.

READ ALSO: Success Is in the Details

UW: The EBRD has downgraded its economic predictions for Ukraine for 2013. You expect its GDP growth at less than 1%. What was this based on?

This comes from the steep slowdown of industrial production growth in Q4’2012, hampering of reforms, including those on gas or the division of NAK NaftoGaz Ukraine into different companies, among others. Energy reform in Ukraine depends on the choice between the association with the EU and joining the Customs Union – and it has not been made yet.

In addition to that, the worsening of the global financial markets, mostly euro zone, has an impact. As an export-dependent country, Ukraine has its main trade partners that buy its goods in Europe. Obviously, the slowdown in Europe echoed in Ukraine. 

This is Articte sidebar